The Astute Angle

A fresh and simplified perspective on personal finance topics

Important Health Insurance Changes for Small Business Owners

Many Americans are conditioned to treat employer-provided health insurance as an entitlement. This long-standing attitude stems from a system that, for decades, has precluded a large segment of the population from finding reasonably priced health insurance on their own. Anyone with a previous victory over cancer or a child with diabetes likely knows from experience that private health insurance is hardly even an option given the egregious costs. As a result, individuals or families in these and other similar circumstances have been essentially forced to find work that provides health insurance or stay in a job because of the health insurance. This condition, known by economists as “job lock”, has historically kept people in undesirable jobs solely to maintain health insurance.

When the Affordable Care Act officially becomes law, “job lock” will be a historical memory. The new law changes the game for employers, especially small employers, by leveling the playing field and removing the need for job seekers to look only for employment that comes with health insurance.

In addition to benefiting from the leveled playing field, small business owners have important decisions to make about employer health insurance in 2014. If you own a small business, you need to consider the tax credits now available to businesses with less than 25 employees. If many of your employees are low income (earning less than $40k for individuals), you need to understand the potential negative impact of continuing to provide insurance. You also need to consider the small business health insurance marketplace (Officially, the Small Business Health Options Program or “SHOP exchange”) which will allow you to pool risks in order to achieve more competitive rates.

There was a nice summary of the new desicions for small business owners in Forbes last month. We would encourage all small business owners to read this piece for a better understanding of the changes resulting from the Affordable Care Act that we have alluded to above. At the end of the Forbes article, the author provides four recommendations for employers with less than 50 employees. These recommendations are listed below with our comments:

1) If you currently provide health insurance, continue to do so, and compare what you currently provide with the SHOP exchange. For 2014, it will probably be best to stay with your current coverage. Revisit this again in 2015.

RPG: First, if you are an employer with older employees or employees with pre-existing conditions, it is almost certainly worth your time to price coverage using the new SHOP exchange, which will open on November 1st. Second, if you already have attractively priced insurance, lock it in for 2014. As we mentioned in a previous post, coverage locked in before year-end does not have to meet the new ACA guidelines or pricing and so you want to lock-in the attractive pricing for as long as possible. The third point is counterintuitive but if most or all of your employees make less than 400% of the Federal Poverty Level ($45,960 for an individual, $94,200 for family of four), you could be doing them a disservice by providing health insurance. The insurance you provide may make them ineligible for the federal subsidies in 2014, which are likely to be more generous.

2) If you don’t offer any insurance and your employees generally earn more than 400% poverty level, sign up for the SHOP exchange. Tell your employees how much they could save on taxes by purchasing insurance through the exchange and how much they should appreciate you for going through the effort. You can be extra nice and pay part of the premium, but since your employees are well paid, you most likely won’t get a tax credit.

RPG: Agreed. There is no downside or cost other than the time it takes to sign up. Employees should appreciate the ability to save thousands by paying insurance premiums with pre-tax dollars.

3) If you don’t offer any insurance, and your employees are a “mixed group” making above and below 400% federal poverty level, you should sign up for the SHOP exchange. Those making above 400% poverty level will appreciate it. Those making less than 400% poverty level should opt for the individual exchange – most likely, their insurance will be expensive enough to qualify for a premium tax credit.

RPG: Agreed. Again, there is no downside to signing up for the SHOP exchange and higher paid employees should appreciate the effort.

4) If all of your employees make less than 400% poverty level, and you do not, still consider signing up for the SHOP exchange. You can buy insurance through the exchange and save taxes on your premium.

RPG: If you fit this final situation, there is less of a compelling reason to sign up for the SHOP exchange.

Closing Comments

Whether you support or oppose the Affordable Care Act, if you are a small business owner, there are some important steps that you need to consider before the end of the year. We hope that the information above and the linked article are useful in getting you started. As we have mentioned before, please do not hesitate to use as a resource to help you navigate the new landscape for small business owners.

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Jason Lina is a Partner, Lead Advisor, and Chief Investment Officer at Resource Planning Group where he advises clients in financial planning matters covering investments, taxes, estate planning, retirement planning, personal finance, education planning, and insurance. He is a Chartered Financial Analyst (CFA) charterholder and a CERTIFIED FINANCIAL PLANNER™ (CFP) with over 18 years of professional experience in the financial services industry.
Jason earned his MBA from the Tuck School of Business at Dartmouth College, and received his undergraduate degree (BA, History) from Davidson College where he was captain of the golf team and a first-team Academic All-American.
You can find Jason's personal biography and contact information here.